Tesla: Too Much Innovation, Too Soon?

by Tom Taulli | September 27, 2012 10:00 am

Tesla: Too Much Innovation, Too Soon?

[1]A couple of weeks ago, Tesla (NASDAQ:TSLA[2]) co-founder and CEO Elon Musk told Fox Business News that there would be a “tsunami of hurt” for short sellers[3]. Well, since then the stock has gone down close to 8%.

Funny enough, short sellers always love to get criticized from CEOs. It’s usually a tell-tale sign that trouble is in the offing!

And this certainly seems to be the case with Tesla. The company just dropped it guidance. For the third quarter, revenues are now expected to range from $44 million to $46 million, which is down from the Wall Street consensus of $83.1 million. The full-year revenue forecast is for $400 million to $440 million, versus Tesla’s prior guidance of $560 million to $600 million.

Keep in mind that the company is launching its new all-electric sedan, called the Model S. The cost of the vehicle ranges from $50,000 to nearly $100,000, assuming the use of a federal tax credit.

It’s certainly reasonable that the process will be far from smooth. For example, it looks like there are product delays.

But this may be just a minor issue. After all, Tesla relies on government support, with the company getting a $465 million loan from the Department of Energy in 2009. Interestingly enough, the federal agency is now requiring a plan for “early repayment.”

Let’s face it, in light of the huge budget deficits as well as the bankruptcies of government-supported companies like Solyndra, there isn’t much appetite in the U.S. for federal funding of new business ideas. So, to get backing, Tesla has filed papers to sell 4.34 million shares.

Tesla is certainly a cutting-edge company. Musk has hired top people from Google (NASDAQ:GOOG[4]) and Apple (NASDAQ:AAPL[5]) to build a next-generation vehicles. But I think the ultimate problem for Tesla may actually be toomuch innovation.

Keep in mind that consumers are notoriously resistant to change, especially when it comes to something that’s ingrained. This is definitely the case with cars. All in all, the concept of an all-electric vehicle is often scary to many people. Is it safe? Is it really worth the price? Is it too cumbersome?

Musk is trying to combat this by making products that have Apple-like simplicity. But this may still not be enough. He’ll need to also have Apple-like marketing, which is extremely expensive. Consider that GM (NYSE:GM[6]) has spent huge amounts for commercials of its Volt — and the results have so far been disastrous.

Despite all this, I think electric cars will eventually become ubiquitous. But that will likely take a long time to happen, which is nothing new in the tech world. Just look at one of the darlings of the dot-com boom: Webvan. The company built a home-delivery system for groceries, which used sophisticated distribution centers and refrigerated trucks. The problem? Consumers weren’t ready for it. Instead, it’s only during the past couple of years that home-delivery of groceries ordered online has gotten traction.

It’s certainly tough to get a feel for the right timing for electric cars. And Tesla is trying to find ways to make the transition seamless. For example, the company has announced it will build a network of solar-power charging stations. It will allow for only 30-minute charges. But while this is a big improvement, it is will still require a big change in behavior. Is pumping gas so bad?

So, investors need to be careful. Whenever it comes to highly innovative technologies, it often takes many years to go mainstream. And this could be extremely tough for a small operator like Tesla. In other words, there appears to be lots of risk with the stock.

Tom Taulli runs the InvestorPlace blog IPOPlaybook[7], a site dedicated to the hottest news and rumors about initial public offerings. He also is the author of “All About Short Selling”[8] and“All About Commodities.”[9] Follow him on Twitter at@ttaulli[10]. As of this writing, he did not hold a position in any of the aforementioned securities.